Reference no: EM132516012

Fiesta Shirts produces two types of t-shirts-crew neck and v-neck. The variable cost of producing each crew neck shirt is $4.25, and $4.50 per shirt for each v-neck. Fixed costs per shirt are $1.50 per shirt when the production level is 12,000 of both types of shirts. The fixed cost is for factory costs including rent, depreciation, and insurance. Crew necks are currently sold for $7.00 each, while v-necks are sold for $8.00 each. During the past year, the company has sold 12,000 of each type of shirt. The company estimates it can sell 14,000 crew neck shirts during the upcoming year if it reduces the selling price to $6.50 per shirt.

Question a. Prepare the incremental analysis (calculate incremental revenue, cost and profit) to evaluate this situation for the coming year.

Question b. Should Fiesta Shirts reduce the selling price? Why or why not?